Explainer: Grocery code of conduct for supermarkets and suppliers

Explainer – The big supermarket chains will soon face fines of up to $3 million if they do not treat small suppliers fairly.

On 1 September, the government released the details of its new grocery code of conduct – the latest step to reform the grocery sector after a set of recommendations from a Commerce Commission market study, which found competition was stifled in the $22 billion industry and not working well for consumers.

Why is this happening?

The commission’s report last year highlighted that New Zealand’s retail grocery prices appeared comparatively high by international standards and the profitability of major retailers also appeared high.

In March, Stats NZ reported food prices had risen to their fastest annual rate in more than 30 years, driven by sharp increases in groceries, fruits and vegetables.

Consumer NZ has also been warning about what it called “dodgy specials”.

The food and grocery sector is dominated by Foodstuffs with its New World, PAK’nSAVE, and Four Square chains, and the rival Woolworths (formerly Countdown), Fresh Choice and Super Value chains owned by Australia’s Woolworths.

Between them they have about 80 percent of the market.

The report found they also dominated wholesaling and distribution and amassed large land banks in part to stymie rivals setting up shop.

After the report was released, the government announced it would bring in a range of measures to rein in the supermarket duopoly.

Among the measures introduced are a mandatory code of conduct, a law banning major supermarkets from blocking their competitors from accessing land, and required them to abide by a wholesale regime.

Minister and commissioner cite unfair treatment

At the announcement, Minister of Commerce and Consumer Affairs Duncan Webb brought up several examples of where supermarkets had been treating suppliers, particularly small to medium ones, unfairly.

For example, turning away fresh produce if they did not meet the quality standard, but days later, by which point the produce no longer could be sold elsewhere. Or removing supplier’s products from shelves when a price increase is requested, and having suppliers pay for breakages in stores.

Grocery Commissioner Pierre van Heerden, who was appointed in July and will monitor enforcement of the code, said in his experience in the industry he had seen what was called ‘investment buying’.

It is when a supermarket agrees with a supplier to place a promotion on a product but then sets aside a certain volume to later sell at a higher price.

“Many of them [supermarkets] work on what is called scan data. So in other words, the supplier will only be charged for whatever goes through the till. Others don’t work on scan. And that is what we trying to ensure in the code that they don’t then later sell it at a higher price and the supermarket profits.”

The lack of competition also meant small suppliers felt pressured to accept any offer to get their product on shelves, van Heerden said.

What will change?

The new rules will initially apply to the two main supermarket chains, Woolworths, formerly Countdown, and Foodstuffs, which runs the PAK’nSAVE, New World and Four Square brands.

The code requires supermarkets to act in good faith with suppliers, to pay them on time, have plain-English supply contracts, and bans retrospective contract changes.

Breaches of the Code will result in penalties with fines up to $3 million or 3 percent of turnover, whichever is the greater. Individuals face fines up to $200,000.

However, the code does not take into consideration historical disputes, for which Minister Webb said there were court remedies available.

Van Heerden also clarified while the code allowed for fines to individuals up to $200,000, in the Act itself that could be up to $500,000 for individuals.

“Normally, [to impose a fine] that goes through legal process, as has been the case in telcos and other areas. We are hoping that with the spotlight that we put on the industry that we won’t need to run for years on these, that we can get them done a lot quicker.”

He said the suite of measures introduced would ensure a good trading environment.

“They’ve got to operate in good faith, which is a very broad, overarching term, but ensuring that supply agreements are in writing.

“There aren’t any unilateral variations from the supermarket’s, they can’t force suppliers to use certain transport or other services. They can’t force supply to suppliers to pay for their own business costs, like transporting goods between stores, merchandising and other things.

“So there’s actually a lot in here.

“There’s a provision now where smaller suppliers can actually get together and work together so that they can negotiate better terms with a supermarket.”

It also covers promotions to ensure the so-called investment buying is not happening by providing clarity on the volume of product to be sold on promotion.

The code will come into full force over the next six months, during which retailers and suppliers are expected to be negotiating under the new code.

More details on the code are available on the Ministry of Business, Innovation and Employment website.

What does it mean for consumers?

Apart from making sure price discounts from the supplier heads to the shopper, the minister and commissioner have also highlighted “innovation” and variety as one of the potential benefits to customers from this code.

“Prices are higher than they should be, and competition will enable them to come down,” Van Heerden said.

“But there’s more to that. We want innovation in the market. We want to ensure that there’s a bigger range, we want to make sure that Kiwis have the choice.”

He also hoped that supermarkets would dip in and add to supplier discounts, which would encourage more competition.

“We want to make sure that the Kiwi consumers … get the full benefits. So that’s why we’re encouraging them both to contribute.”

But will it mean prices go back to how they were? Probably not. The commissioner said they were looking at the forward-looking changes.

The commissioner also said unit pricing – one of the recommendations from the report – would give consumers a better way of evaluating their choice.

“Hopefully, we would be able to [do it online] once everything has been implemented, and the larger supermarkets have to have it, whether they online or not.”

What if they breach the code?

The commissioner has said his office had wide ranging powers to request information from suppliers and from supermarkets for monitoring and

investigations.

They could go as far back as seven years if needed, he said. However, the minister has indicated that the code does not consider historical disputes, for which there are court remedies available instead.

“What we will be doing over the next year as well, before our next report comes out, is we’re working with supermarkets to get a lot of the information from them,” Van Heerden said.

“There’s a reporting regime that’s in place, and that’s in place on the wholesale side, and also on other aspects of the trade, we will come back with a report to the government and to consumers to say that over the past year, the following has happened in the industry.”

The commissioner can then make recommendations to the government about any further changes required.

The minister has also emphasised that they would take further action “at the supply side and at the checkout end” if things do not improve.

The commissioner encouraged suppliers to report any issues to his office, and assured them of anonymity.